Thursday, June 7, 2012

In
its recent decision in Federal Ins. Co.
v. Sandusky, 2012 U.S. Dist. LEXIS 76880 (M.D. Pa. June 4, 2012), the
United States District Court for the Middle District of Pennsylvania had
occasion to consider whether a D&O insurer was required to defend an
employee of the insured in connection with underlying criminal and civil
matters arising out of alleged molestation of children.

Federal
Insurance Company issued a directors and officers and employment practices
policy to The Second Mile, a charitable organization founded in part by Gerry
Sandusky, who has received great notoriety for having allegedly molested
numerous children both during and after his time as a coach for the Penn State
football team.Following a grand jury
investigation, Sandusky was charged with forty criminal counts, including
sexual assault and unlawful contact with a minor.Sandusky and The Second Mile were also named
as defendants in a civil suit filed in Pennsylvania.Sandusky sought coverage under the Federal
policy, and Federal advanced Sandusky’s criminal attorney $125,000 in legal
fees, subject to a reservation of rights.Federal thereafter filed a declaratory judgment action.

Federal
agreed that Sandusky qualified as an insured person under the policy.It nevertheless sought a declaration that Sandusky
was not entitled to coverage for the underlying criminal and civil matters
because he was not acting in an insured capacity as an employee or executive of
The Second Mile when he committed the alleged acts.Federal also contended that the policy’s
D&O coverage excluded bodily injury, willful statutory violations and
sexual harassment.Prior to commencing
discovery, however, Federal moved for judgment on the pleadings, arguing that
“were The Second Mile’s insurance policy ultimately interpreted to cover losses
stemming from the allegations of sexual abuse and molestation of minors, the
insurance policy would be void as against Pennsylvania’s public policy.”Thus, before addressing the coverage issues
stemming from the policy, Federal sought a judgment based solely on public
policy grounds.

The
court acknowledged that “[s]exual abuse and molestation of children are ‘so
obviously … against the public health, safety, morals or welfare that there is
a virtual unanimity of opinion with regard to it.” This unanimity of opinion, explained the
court, is reflected in numerous Pennsylvania laws concerning the safety of
children.The court further observed
that “public policy bars enforcement of insurance contracts that indemnify
insured persons for damages arising from reprehensible conduct.”Given these factors, the court determined
that Pennsylvania would deem unenforceable, as a matter of law, any contract
indemnifying the perpetrator of intentional sexual molestation of
children.As the court explained:

Such a contract would allow an insured to shift the
consequences of intentional, reprehensible conduct to an insurance company,
thereby abdicating personal responsibility. It is entirely clear, and this
Court holds, that the public policy of Pennsylvania as announced by its courts
prohibits the reimbursement of Sandusky for any damage award that he may ultimately
be found to owe arising from the allegations that he molested and sexually
abused children.

While
the court concluded that Sandusky was not entitled to indemnification for the
alleged conduct, it nevertheless struggled with the issue of whether he was entitled
to a defense.The court noted that the issue
of whether providing a defense in a sexual molestation case violates public
policy was one of first impression under Pennsylvania law.The court acknowledged that general rule that
there can be no duty to defend allegations that are not potentially covered,
but explained that “where, as here, an insurance policy specifically includes
defense costs as covered loss, separate and apart from damages, the mechanical
process of determining whether there could be coverage for damages in order to
determine whether there is a duty to defend cannot be applied.”

Ultimately,
the court avoided ruling on the issue of defense costs, explaining that
“[w]ithout the benefit of a factual record, it is not entirely clear that
Pennsylvania's public policy would prohibit enforcement of the insurance policy
to the extent that it provides Sandusky with defense costs.”The court specifically concluded that further
development of facts through discovery could bear on the issue of the court’s
public policy determination, such as whether Sandusky himself purchased the
Federal policy and did so knowing that criminal charges were imminent.